Providing Insights that Contribute to Better Health Policy

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Many policy makers believe that when Medicare constrains its
payment rates for hospital inpatient care, private insurers end up paying
higher rates as a result. I tested this “cost-shifting” theory using a unique
new data set that combines MarketScan private claims data with
Medicare hospital cost reports. Contrary to the theory, I found that
hospital markets with relatively slow growth in Medicare inpatient
hospital payment rates also had relatively slow growth in private hospital
payment rates during 1995–2009. Using regression analyses, I found that
a 10 percent reduction in Medicare payment rates led to an estimated
reduction in private payment rates of 3 percent or 8 percent, depending
on the statistical model used. These payment rate spillovers may reflect
an effort by hospitals to rein in their operating costs in the face of lower
Medicare payment rates. Alternatively, hospitals facing cuts in Medicare
payment rates may also cut the payment rates they seek from private
payers to attract more privately insured patients. My findings indicate
that repealing cuts in Medicare payment rates would not slow the growth
in spending on hospital care by private insurers and would in fact be
likely to accelerate the growth in private insurers’ costs and premiums.

Access to this article is available at the Health Affairs Web site. (Free access until May 7, 2014.)